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ATCO Gas and Pipelines Ltd. – Decision on Preliminary Question Application for Review of Decision 24333-D01-2019 2017, AUC Decision 25380-D01-2020

Link to Decision Summarized

Rates – PBR – Review and Variance


In this decision, the AUC considered a review application filed by ATCO Gas, the distribution division of ATCO Gas and Pipelines Ltd., requesting a review and variance of specific findings in AUC Decision 24333-D01-2019 (the “Decision”). The AUC denied the review application.

In this decision, the members of the AUC panel who authored the Decision were referred to as the “Hearing Panel” and the members of the AUC panel considering the review application were referred to as the “Review Panel.”

Background

The Hearing Panel issued the Decision on December 20, 2019. Direction, 2 of Decision 23789-D01-2019, required ATCO Gas, among other matters, to explain the increase in net book value (“NBV”) for assets transferred from ATCO Pipelines to ATCO Gas. The Hearing Panel accepted ATCO Gas’s explanation for the increase in NBV for contributions being transferred and recorded separately as opposed to being netted against capital expenditures (as they were in the forecast) and approved those amounts for inclusion in the K factor. However, the Hearing Panel was not persuaded that the evidence filed by ATCO Gas adequately established the prudence of costs associated with additional assets required as a result of the completion of the detailed design and additional capital work completed on the transmission line after the original estimate. The Hearing Panel required those amounts to be removed from ATCO Gas’s 2017 K factor.

AUC’s Review Process

The AUC’s authority to review its own decisions is discretionary and is found in Section 10 of the Alberta Utilities Commission Act. That act authorizes the AUC to make rules governing its review process and the AUC established Rule 016 under that authority. Rule 016 sets out the process for considering an application for review.

The review process has two stages. In the first stage, a review panel must decide whether there are grounds to review the original decision. This is sometimes referred to as the “preliminary question.” If the review panel decides that there are grounds to review the decision, the AUC moves to the second stage of the review process where the AUC holds a hearing or other proceeding to decide whether to confirm, vary, or rescind the original decision. In this decision, the Review Panel decided the preliminary question.

Grounds for Review

ATCO Gas submitted that the Hearing Panel made findings that were errors of fact, law, or jurisdiction. The arguments presented in ATCO Gas’s review application concerning each of these alleged errors were summarized as follows:

(a)     The Hearing Panel erred by excluding prudently incurred acquisition costs of assets currently used and required to be used for distribution service.

(b)     The Hearing Panel erred by failing to address the Inter-Affiliate Code of Conduct (“IACC”) requiring acquisition cost to be at NBV.

(c)     The Hearing Panel changed its prudence test for reviewing the NBV acquisition cost, which had been accepted by the AUC in every prior iteration of ATCO Gas’s Capital Tracker filings, after-the-fact with no prior notice, resulting in a breach of procedural fairness.

Exclusion of Prudently Incurred Acquisition Costs: Errors of Fact and Law

ATCO Gas submitted that the Hearing Panel excluded from rate base the prudent cost of physical assets currently used and required to be used to maintain safe and reliable gas distribution service contrary to Section 37 of the Gas Utilities Act (“GUA”). It stated that the cost of the additional transferred assets should be included in rate base because gas distribution service cannot be maintained without the operation of those transferred facilities. In ATCO Gas’s view, inherent in the AUC’s approval to re-purpose gas transmission assets for gas distribution service rather than to construct new gas distribution facilities is an acknowledgement that the NBV of the former gas transmission assets necessarily would reflect costs initially incurred to provide high-pressure gas transmission service while the assets were used by ATCO Pipelines. ATCO Gas submitted that the Hearing Panel changed the test for inclusion of the full NBV of these assets after ATCO Gas purchased and re-purposed them, which it said is arbitrary, unfair, and prejudicial.

Failure to Address the IACC Requiring Acquisition Cost to be NBV: Errors of Fact and Law

ATCO Gas stated that in all capital tracker applications filed under the 2013-2017 PBR plan, it and ATCO Pipelines had consistently priced the transfer of former gas transmission assets remaining in regulated service in a manner consistent with the IACC and with prior AUC approvals. ATCO Gas submitted that the Hearing Panel did not respond to its argument that its prudence was demonstrated, in part, by complying with the AUC’s directions outlined in the IACC. ATCO Gas added that disallowing part of the NBV while failing to provide reasons constitutes an error of law and/or fact.

Changing the Prudence Test Without Prior Notice: Errors of Law and Jurisdiction and Breach of Procedural Fairness

ATCO Gas submitted that the Hearing Panel’s prudence assessment related to the acquisition of the transmission assets was inconsistent with that applied in prior capital tracker true-up applications. ATCO Gas submitted that the Decision set a new prudence test and submitted that the Hearing Panel, for the first time and without prior notice, disaggregated and disallowed components of ATCO Pipelines’ historical costs reflected in the NBV calculation after the facilities were purchased. ATCO Gas stated that its acquisition cost of the transferred assets was at NBV at time of transfer, calculated in the same manner as in all prior ATCO Pipelines asset transfers, which is consistent with Section 37 of the GUA, and that the IACC has been consistently approved by the AUC as prudent in previous utility pipeline replacement asset transfers. ATCO Gas submitted that the arrival at a different conclusion by the Hearing Panel reflects the adoption of a different test, which is inconsistent with a no-hindsight prudence review. In ATCO Gas’s view, it was arbitrary and unfair for the Hearing Panel to alter the prudence test, without notice, in the final year of the capital tracker program which formed part of the 2013-2017 PBR plan, and that it was inconsistent with ATCO Gas’s legitimate expectations and the principles underlying a supportive, predictable regulatory environment.

Review Panel Findings

The Review Panel found no error that could lead it to materially vary or rescind the Decision.

The Review Panel found that ATCO Gas’s argument that the Hearing Panel changed the test for prudence was not supported by a reading of the Decision. The Hearing Panel had set out the test for prudence in the Decision where it adopted guidance from the Supreme Court of Canada involving appeals from decisions of the AUC and the Ontario Energy Board and in doing so, noted that “if there is insufficient information to determine that the decision was reasonable, the AUC has the discretion to direct disallowances.” The Review Panel was of the view that a plain reading of the Decision showed that the Hearing Panel applied the appropriate test for prudence and that ultimately, it was not persuaded that the evidence filed by ATCO Gas adequately established that costs associated with the additional assets and capital work were prudent. The Review Panel considered the Hearing Panel’s conclusions in this regard to be reasonable as they were grounded in the facts on the record, and were consistent with Section 37 of the GUA, contrary to ATCO Gas’s suggestion.

The Review Panel did not accept ATCO Gas’s argument that the Hearing Panel erred in assessing prudence in a manner inconsistent with that applied in prior capital tracker true-up applications, nor that in arriving at a different conclusion, it must have applied a different test. The Hearing Panel’s arrival at a different conclusion than that in prior capital tracker true-up applications did not, on its face, amount to the application of a different test. Adopting ATCO Gas’s submissions in this regard would render the AUC’s prudence review under Section 37 of the GUA moot, and effectively strip the AUC of its ability to exercise discretion on the facts before it.

The Review Panel also disagreed with ATCO Gas that it was not afforded procedural fairness as a result of the Hearing Panel’s findings and its assessment of prudence. ATCO Gas was given multiple opportunities to provide the AUC with sufficient evidence to demonstrate the prudence of the increase in NBV of the utility pipeline replacement portion of the transmission driven capital program.

ATCO Gas submitted that the Hearing Panel failed to address its argument on the IACC-prescribed NBV on the books of the seller. In the Review Panel’s view, a plain reading of the Decision clearly demonstrated that the Hearing Panel considered the IACC, as evidenced by its acknowledgement of ATCO Gas’s reply argument, and its findings on ATCO Gas’s use of an accumulated depreciation factor and ATCO Pipelines Capitalization Policy. Furthermore, the Review Panel considered the IACC to be only one factor amongst many examined by the Hearing Panel in conducting its prudence assessment.

ATCO Gas argued that the Hearing Panel could not find the costs of the transferred assets to be imprudent because it paid the price prescribed under the IACC, and all NBV costs for each of the assets transferred were previously found to be prudent in ATCO Pipelines’ rate applications. The AUC’s role in a capital tracker application is to ensure that it is satisfied with differences between forecast costs of the transferred assets approved for capital tracker treatment and the actual costs of the transferred assets, particularly where there are significant differences, as is the case here. A requirement to accept the price set out in the IACC and prior rate applications would, without further inquiry, fetter the AUC’s discretion when evaluating the several factors it must consider in assessing prudence. Therefore, the price set in the IACC and prior rate applications was not determinative, and it is incumbent upon the AUC to make further inquiries, when necessary, to satisfy itself that any price differences are prudent. It was clear on the face of the Decision that during Proceeding 24333, the Hearing Panel made further inquiries of ATCO Gas in respect of the difference between the forecast costs of the transferred utility pipeline replacement assets previously approved for capital tracker treatment and the actual costs of those assets when transferred. The Hearing Panel was not satisfied that the evidence provided supported the increase between forecast and actual costs and therefore found some aspects of those increased costs to be imprudent.

Decision

In answering the preliminary question, the Review Panel found that ATCO Gas did not meet the requirements for a review of the findings of the Hearing Panel in Decision 24333-D01-2019, and the application for review was dismissed.

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